Transforming India Gold MarketBy Sameer Patil, Head – Business Development, BSE
Published on June 4, 2018
Gold is intertwined with India’s way of life. The precious metal has a very important place not just in the country’s cultural milieu, but also its economy. This public’s close relationship to gold may be viewed not just from the perspective of tradition but in economic terms as well.
Indians have always invested a portion of their savings in gold and other precious metals. The average Indian household saves over 20 percent of its annual income in the form of gold and silver ornaments. India is the world’s second-largest gold market, with around 800 tonnes of domestic demand per annum, which accounts for around 25 percent of global demand. India’s appetite for gold is met largely through imports, with less than 1 percent coming from local mining and about 10 percent from recycling.
Considering that gold is a hugely popular investment vehicle in India, there is an urgent need for a uniform and regulated market mechanism to facilitate its trading. However, the Indian gold market is extremely fragmented, with prices varying significantly across channels and locations.
As the global gold market continues to shift from the West to the East, many Asian countries including China, Singapore and the UAE have set up global-scale physical infrastructure to cater to the growth in demand in the region. Gold exchanges and related infrastructure set up by these countries appear to have greatly enhanced the efficiency of their gold markets.
India, moving in the same direction, has initiated various gold market reforms. BSE, Asia’s oldest stock exchange and the world’s fastest exchange with a speed of 6 microseconds, is contributing in various ways to advance the country’s gold market reforms and initiatives.
India’s sovereign gold schemes, which include the gold monetisation scheme and the sovereign gold bond (SGB) scheme, are initiatives to reduce the country’s gold imports and allow gold that is lying idle with individuals to be used as an easily accessible financial asset.
SGBs passively track the price of gold and hence functions as an investment equivalent to holding physical gold. BSE is acting as a receiving office, and aggregates applications and the transfer of funds. BSE also provides a secondary market platform for investors who wish to sell these bonds before the maturity, if held in demat form.
India, despite being one of the largest consumers of gold in the world, plays a relatively small role in the global bullion market and in the process of determining the price of gold. Setting up a bullion spot exchange would lead to efficient price discovery, assurance in the quality of gold, active retail participation, greater integration with financial markets, and greater gold recycling. BSE is preparing to launch a bullion exchange for gold that can address lacunae in the gold market. The spot exchange would create a vibrant gold ecosystem in India commensurate with India’s large share of global gold consumption.
The Securities and Exchange Board of India (SEBI) has approved the created of an integrated platform for trading in equities, currency and commodities by October 2018, essentially creating a universal exchange. When fully implemented, this would provide a highly regulated, safer and more transparent trading, clearing and settlement framework that would facilitate trades for participants in various markets. With this, BSE hopes to offer commodities derivatives segment to complement its gold offerings.
BSE opened India International Exchange IFSC Limited (India INX), the country’s first international exchange, at the International Financial Services Center (IFSC), GIFT city, Gandhinagar, in January 2017. It has one of the world’s most advanced technology platforms and operates for 22 hours a day to allow international investors to trade from anywhere across the globe. India INX offers trading in two variants of gold derivative contracts, the Gold Future and Option Contract and the Gold KG Future Contract, which have recorded significant trading volumes.
With its efforts to modernise India’s gold market, BSE should continue to play a pivotal role in growth and development of India’s bullion market going forward, thus enabling gold to serve as a legitimate asset class for millions and for it to play a dynamic economic role.
By extending its platform for gold’s physical market, gold derivatives and distribution of various gold schemes, BSE efforts will enable India to integrate better with global markets, which will allow the country to emerge as a key market for gold.
Disclaimer: The views and opinions expressed in this article belong solely to the author, and do not reflect the view of BSE.Back to Index